Nuances of the term ‘dispute’ under the Insolvency & Bankruptcy Code

The scope of the term ‘dispute’ has been the subject of extensive judicial discussion under the IBC. The term dispute has been defined as any suit or arbitration proceeding relating to: existence of an amount of the debt; quality of goods and services; breach of a representation or warranty. Various benches of NCLT have had conflicting views on interpretation of the term ‘dispute’. Below are the landmark ruling w.r.t to the term ‘dispute’ under the IBC.

1. A dispute over breach of Non-Disclosure Agreement

Mobilox Innovations (P.) Ltd. v. Kirusa Software (P.) Ltd. [2017] 85 taxmann.com 292 (SC)

In this landmark ruling, the Supreme Court allowed for examination of merits of a dispute to the extent it is necessary to determine whether a dispute is a bogus or not. In the instant case, there were two parties Mobilox innovations pvt. Ltd (appellant), conducting tele-voting process for a program in Star TV which is named as Nach Baliye. The appellant engaged the Kirusa software pvt. Ltd. (respondent company) for providing various services relating to the TV program, and both the parties executed a non-disclosure agreement.

The non-disclosure agreement stipulated certain conditions such as confidentiality obligations towards the appellant. During the time period of contract respondent-company raised necessary monthly invoices for the rendered services.

However, the appellant informed the respondent about the payments that were subsequently withheld due to breach of the non-disclosure agreement obligations.

Due to the non-payment of the monthly invoices by the appellant, the respondent-company sent a demand notice to appellant under Section 8 of the Insolvency and Bankruptcy Code.

The Appellant responded to the demand notice stated that there was a bona fide and serious dispute between the parties, inclusive of the breach of obligations mentioned under the non-disclosure agreement.

The Respondent approached NCLT by filing application for insolvency resolution process against appellant under section 9 of the Code and the said application was dismissed by NCLT on grounds that a notice of dispute had been issued by appellant.

The Appellate Authority however allowed appeal of respondent holding that adjudicating authority had acted mechanically and rejected application under sub-section 9 without examination. Once operational creditor has filed an application, which is otherwise complete, adjudicating authority must reject application under section 9 of the Code if notice of dispute has been received by operational creditor or there is a record of dispute in information utility.

All that adjudicating authority was to see at this stage that whether there was a plausible contention which requires further investigation and that dispute was not a patently feeble legal argument or an assertion of fact unsupported by evidence, however, in doing so, Court could not need to be satisfied that defense was likely to succeed.

Thus claim of corporate debtor that there existed a dispute in relation to breach of Non-Disclosure Agreement was sufficient to refuse entertainment of insolvency application by operational creditor. Hence, Appellate Tribunal was wholly incorrect in characterizing defense as vague, got-up and motivated to evade liability

In order to find relevant cases on the term ‘dispute’ Taxmann.com provides see more function that fetches the relevant cases on sections involved, cases on this sections, cases referred and forward case reference.

2. A dispute over a professional fee rendered by an advocate to the company

India corp Law v. Paadm International Hotels (P.) Ltd. [2020] 113 taxmann.com 280 (NCLT – New Delhi)

There being a dispute between operational creditor and corporate debtor over professional fee as corporate debtor failed to keep its promise to pay professional fee.

The fact of the case was that, the operational creditor was an advocate and running proprietary firm with name of M/s India crop Law whereas the corporate debtor was a private company incorporated under the Companies Act. The corporate debtor hired operational creditor for legal services and committed to pay Rs. 2.25 lakh but paid only Rs. 50,000.

Despite repeated reminders by the operational creditor, the corporate debtor did not pay of professional fees. Therefore, operational creditor issued demand notice against corporate debtor and the corporate debtor had neither raised any dispute nor made any payment towards the outstanding dues.

On being aggrieved, the operational creditor filed the instant application for initiating Corporate Insolvency and Resolution Process under section 9 of the Insolvency and Bankruptcy Code, 2016.

The NCLT held the operational creditor was entitled to claim its dues, which remain uncontroverted by the corporate debtor, establishing the default in payment of the operational debt beyond doubt. The present application was admitted, in terms of section 9(5) of the Insolvency and Bankruptcy Code, 2016.

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